Topic: Tax and Budget Policy

The USTR Pulls An All-Nighter

With only minutes before a key deadline, the Bush administration formally notified Congress last night that a deal had been reached with South Korea on a free trade agreement. The Office of the United States Trade Representative’s press release (which contains not many details and plenty of the usual mercantalist, all-exports-all-the-time rhetoric) can be viewed here.

As expected, rice was not included in the agreement. Korean negotiators had been adamant that rice, an extremely sensitive (i.e., protected) sector in Korea, was not on the table for negotiation and that a deal would be impossible if the United States insisted on pushing for access to the Korean rice market. On that basis, the Americans evidently decided to drop the rice issue.

Rice was never so much a concern, though, as beef. U.S. beef has been denied access to Korea on food safety grounds since late 2003, when BSE was found in beef originating in Canada. Although the issue was not formally part of the FTA negotiations, and thus was not resolved in the agreement itself, it has the potential to scupper it if lawmakers link their approval of the deal to resolution of the beef dispute. Sen. Max Baucus (D-MT), chair of the Senate Finance Committee, has made it clear that his support for the Korean FTA depends on a full re-opening of the Korean market to U.S. beef. (The Ranking Member of that Committee, Sen. Chuck Grassley (R.-IA), was somewhat more measured in his comments).

Similarly, Sen Debbie Stabenow (D-MI) sees that reducing Korean tariffs (albeit over a long phase-out period for trucks) on U.S. autos and a “restructuring” of the Korean auto tax structure is not enough: her press release insists that she will “do everything in [her] power to defeat this agreement and ensure that any future fast-track authority includes provisions guaranteeing that American businesses and workers can get a fair deal”. Sen. Stabenow does not say what specific measures would assuage her concerns, although one suspects that she is offended at the USTR’s refusal to specify minimum guaranteed sales targets.

In short: yes, the USTR met the deadline of concluding the deal so that it can be considered under fast-track authority. But its passage is far from secured.

More broadly, though, the statements of these lawmakers, especially if it is a taste of what is to come, should worry free-traders everywhere. While bilateral and regional trade agreements are, at best, only the third most optimal way of liberalising trade, the deal between South Korea and the United States was one of the more worthwhile agreements of this administration. And if Congress is going to base support for agreements on its ability to manage trade in certain sectors, then the trade agenda is in serious trouble.

Welfare for the Wealthy (an Ongoing Series)

An earlier post noted the hot political trend of convincing the upper middle class and the wealthy that they are financially vulnerable and in need of government assistance.

From loan subsidies for McMansions to blue-blood public works, from the doling out of market power and financial support to businessmen, to the offering of government money and tax breaks to (usually well-to-do) people who consume in a government-approved manner, politicians of Red stripes and Blue are all about helping the down-and-out in the (gated) community.

Such welfare-for-the-wealthy is the subtext of Sunday’s NYT story about the Children’s Health Insurance Program. CHIP was once intended to help children in families that are low-income but that do not qualify for Medicaid; now Congress is pushing for the state-operated/federally supported program to use its money to cover families up to four times the poverty level (e.g., a family of four earning $82,600 a year) — that is, nearly all families in the second-highest income quintile, aka the upper middle class.

The NYT article includes a provocative figure about the effects of CHIP. When the program was first implemented, the percentage of families with income between the poverty level and 200% of the poverty level (i.e., the families whom the program was intended to help) with uninsured children began to decline, falling from 20% in 1998 to about 12% by 2002. However, the percentage of those lower-income families with privately insured children also began to fall over that time, from about 55% to about 45%. Since 2002, the percentage of uninsured children in that income range has roughly plateaued while the percentage of children with private insurance has continued to fall, to about 35 percent by 2006. This suggests (though, by itself, does not prove) that, by 2002, CHIP had gone about as far as it could go in reducing the percentage of uninsured children in poor families; since then, CHIP has simply displaced private insurance — a dubious policy goal.

Given that, it’s no wonder politicians want to mission-creep CHIP into wealthier income brackets. But one must wonder what the next welfare-for-the-wealthy program will be. Perhaps a chicken in every pot and a Lexus in every garage?

Irish Commissioner Fights EU Tax Harmonization

The former finance minister of Ireland, Charlie McCreevy, is now an EU commissioner. To his credit, he does not appear to have sipped the Kool-Aid in Brussels.

While most EU commissioners push for centralization and tax harmonization, McCreevy is making waves by denouncing the tax harmonization schemes of a fellow commissioner. The Sunday Business Post reports:

Ireland’s European Commissioner, Charlie McCreevy, has launched a strong attack on the European Commission’s efforts to introduce a common business tax base across Europe. McCreevy has warned of the danger of a ‘‘bully-boys’ charter’’ which would favour large states over smaller members like Ireland.

…McCreevy said the tax harmonisation issue was being ‘‘aggressively pushed forward by some in Europe’’. …Referring repeatedly to ‘‘tax harmonisation forces’’, McCreevy warned that, were they successful, it would threaten inward investment to the EU, undermine competitiveness and discriminate against smaller EU states.

Despite outright opposition from a number of member states, including Ireland, the commission has continued to lay the groundwork for the adoption of a common tax base, which is feared by many to be a prelude to the harmonisation of tax rates across Europe. Such a move would inevitably lead to considerably higher tax rates in Ireland, which has among the lowest corporate and personal tax rates in Europe. Brussels sources say there is increasing resentment about the success of Ireland’s low-tax strategy — which is seen by many as ‘‘unfair tax competition’’.

Government Should Not Interfere with Company Pricing Decisions

It is currently illegal for a company to insist that a retailer sell a product at a certain price. Politicians claim that this policy, known as resale price maintenance, results in higher prices. This surely is true, but the key question is why a firm would want to insist on higher prices, especially since the retailer reaps the benefit?

The answer, as Steve Chapman explains in his column, is that some products are more likely to do well if the retalier has an incentive to give potential consumers more time, advice, and service. But this won’t happen if consumers can benefit from this attentiveness at one store and then buy the product at another store:

For a manufacturer to make an agreement with retailers to sell only at a specified minimum price is illegal — even when it promotes competition and offers benefits to consumers. …[E]stablished federal law … treats resale price maintenance agreements as invariably malignant. …The assumption is that if you let manufacturers control retail prices, they’ll hose consumers for their own profit.

But if they wanted to hose consumers, they could just raise the wholesale price they charge to retailers. That way, they would get the full proceeds of the rip-off, instead of sharing them with stores. So it’s reasonable to assume there is some motive besides price-gouging at work.

…Why would a company making purses or televisions or running shoes want to keep prices at a certain minimum? Maybe to induce stores to offer exceptional service or technical assistance. A store can afford to do that only if it can charge a commensurate price. But a service-oriented store can’t charge a commensurate price if a consumer can come in, get lots of help and then go across the street to Discounts Galore and buy the item at 30 percent off. By setting a floor, the manufacturer can prevent “free-riding” by bargain outlets.

In our hypercompetitive retail environment, if the strategy doesn’t serve customers, manufacturers who use it won’t survive. Consumers who can’t get one brand at a discount price will defect to other brands.

Sweden Repeals Wealth Tax

Globalization has been an ally of taxpayers. Because it is increasingly easy for jobs and capital to cross borders, politicians are being forced to eliminate or reduce taxes that penalize productive behavior.

The latest example comes from Sweden, which is now eliminating its tax on wealth:

Maybe the next Bjorn Borg won’t feel compelled to move to Monaco now that Sweden plans to scrap a decades-old “wealth” tax that imposes levies on assets — not just on income. …The move, expected to be approved by parliament later this year, underscores the country’s efforts to keep successful Swedes and their capital at home by changing its fabled but costly welfare state.

“It’s not sustainable to keep taxes that radically diverge from other countries,” Finance Minister Anders Borg, who is not related to the tennis great, told The Associated Press on Thursday. “Not if you want the money to stay in the country.”

Sweden is not alone. The article notes that other nations have been forced to eliminate this punitive levy on capital:

Several European countries have dropped taxes on wealth in the last decade, including Denmark, the Netherlands and Finland.

Switzerland and Monaco seem to be the favored destinations of Sweden’s tax exiles. At least the new government recognizes the damage caused by punitive tax rates. The wealth tax is being abolished in an effort to lure talented entrepreneur and capital back to Sweden:

[T]he wealthiest Swedes have fled the country, including IKEA founder Ingvar Kamprad, No. 4 on Forbes magazine’s list of the world’s richest people. He lives in Switzerland. Five-time Wimbledon winner Bjorn Borg moved to tax-haven Monaco in the late 1970s. The principality is also home to many Swedish sports stars such as Alpine skier Anja Paerson, high-jumper Kajsa Bergqvist and triple jumper Christian Olsson.

The government says more than 500 billion kronor, the equivalent of almost C$83 billion of Swedish capital, is outside of the country’s borders. “This is money that, if it was brought home, could be invested to create jobs and welfare in Sweden,” the country’s coalition leaders said in a joint statement this week.

Stefan Persson, the main owner of fashion retailer H&M, threatened to leave the country in the 1990s because of the wealth tax. The Social Democratic government at the time changed the law, giving him an exemption.

…Borg, the finance minister…added it was necessary for Sweden to remain competitive in an increasingly globalized economy. “It’s a step on the way back toward making Sweden an entrepreneurial society,” he said.

Is Giuliani a Supply-Sider?

Writing in the Wall Street Journal, Steve Forbes endorses Rudy Giuliani and makes a reasonably compelling argument that he believes in smaller government:

Rudy Giuliani…cut taxes and the size of government…. Mr. Giuliani delivered, overcoming the initial resistance of the overwhelmingly Democratic City Council. He ultimately prevailed 23 times, including cuts in sales, personal income, commercial rent and hotel occupancy taxes.

…Mr. Giuliani always made fiscal discipline a priority: instructing city commissioners to cut agency budgets even when the deficits had turned to surpluses. Mr. Giuliani set out to cut the size of city government, insisting that New York should live within its means. New Yorkers saw their quality of life improve with more effective delivery of services while the bureaucratic ranks were being thinned by nearly 20,000 — a near 20% decrease in city headcount, excluding police officers and teachers.

But there are reasons to question Giuliani’s pedigree. In a post on the New York Sun’s political blog, Ryan Sager quotes Giuliani trashing the flat tax:

“It [the flat tax] would really be a disaster and it’s totally inconsistent with the movement of the Republican Congress toward giving more responsibility to state and local government,” Mr. Giuliani said on CNN’s “Capital Gang,” on March 9, 1996.

To be sure, even good policymakers sometimes say silly things because of competing political interests. Nonetheless, it is difficult to reconcile Giuliani’s recent supply-side rhetoric with his harsh 1996 statement. If he had merely expressed concern, that would be understandable, but claiming that a flat tax would be a “disaster” suggests a genuine hostility to the flagship policy goal of supply-side economics.

Pure Protectionism

Several years ago, I appeared on the radio show of the late and much-missed David Brudnoy to discuss deregulation of taxicabs. I advocated a free market and an end to licensing and medallions. We got a call from a spokesman for the taxicab industry, who was outraged. Public safety! he exclaimed. “Without licensing, you could have some crazy person driving a cab and have an accident and you could have a mudda an’ a dotta killed! Do you want to be responsible for that?!”

I remembered that call when I saw the letter in the Washington Post from Michael C. Alin, executive director of the American Society of Interior Designers. Responding to George Will’s column on the absurdity of licensing for interior decorators, Alin writes:

In one of the worst hotel fires in U.S. history, 85 lives were lost and more than 700 people were injured at the MGM Grand Hotel and Casino in Las Vegas in November 1980, partly because some of the materials in the interior finish and furnishing fueled a rapid spreading of the fire. If furniture is placed in such a manner that it impedes egress during an emergency, people will die. Should a nonqualified, non-educated person select the materials for the interior of a hospital, school or high-rise building? 

Will had blithely and insensitively mocked the idea of criminal penalties for impersonating an interior designer:

In Las Vegas, where almost nothing is illegal, it is illegal — unless you are licensed, or employed by someone licensed — to move, in the role of an interior designer, any piece of furniture, such as an armoire, that is more than 69 inches tall. A Nevada bureaucrat says that “placement of furniture” is an aspect of “space planning” and therefore is regulated — restricted to a “registered interior designer.”

Placing furniture without a license? Heaven forfend.

I hope that Will is suitably chastened now that he understands the real risks of letting just anyone pick out wallpaper and position furniture.